63. "The main aim of the Bill is a single, coherent
system that does not make unnecessary distinctions between different
sectors of the financial services industry...However, where there
are good reasons for change...the Government is willing to act....Many
people have stressed the need to anticipate the rapidly changing
nature of the industry ....the Bill ensures that this can be done,
subject to approval by Parliament".[71]

64. Mr Davies, in referring to that Consultation
Document, noted that the Bill "seeks to allow us the flexibility
which will be needed to respond to changing markets in the future
... Financial markets change rapidly and regulation needs to adapt
to those changes if it is to play its crucial roles of protecting
customers and maintaining confidence in the financial system".[72]

65. The Bill has been drafted to cover a potentially
very broad range of business. However, as the Government explained
in its Consultation Document, it is its intention that the scope
of regulation should broadly cover the type of business regulated
at present. The scope of regulated activities is indicated in
general terms in the Bill with the precise scope to be set out
in secondary legislation. The Government promised when publishing
its initial Consultation Document that a draft of the relevant
statutory instrument would be published, at the latest, when the
Bill was introduced. In fact the Treasury published a consultation
document on regulated activities and the draft statutory instruments
on 25 February 1999.[73]
Responses are requested by the end of April.

66. Although it is not the Government's present intention
to make major changes to the current scope of regulation, it has
said that where there are compelling reasons to do so, such as
in relation to Lloyd's, it will make changes to the existing regime.
The Government has also made clear its intention to keep under
review the case for including within the legislation certain activities
which are not regulated at present. Areas for consideration include:

mortgage advice;

credit unions. The Treasury issued a consultation
document on the regulation of credit unions in November 1998.
The consultation period closed in February 1999 and the Government
is currently considering the responses received;

pre­paid funeral plans. The Treasury issued
a consultation document in January 1999. Responses are requested
by 30 April; and

long-term health care insurance. The Government
is considering the regulation of long­term health insurance
in the light of the recommendations made by the Royal Commission
on the Long Term Care of the Elderly, chaired by Sir Stewart Sutherland,
which reported in March 1999.[74]

Other activities, currently excluded, are general
insurance, motor insurance, occupational pension schemes, credit
cards and other unsecured credit.[75]

67. Changes will also be made to the regime applying
to professionals, such as solicitors and accountants, who at present
may be authorised by their professional bodies to carry out investment
business incidental to the practice of their profession. The Government
is proposing measures to reduce unnecessary authorisation of professionals.
Those professionals who will still require authorisation must
be authorised by the FSA. The Government expects "this change
will ensure an overall reduction in the number of authorised persons,
while maintaining high standards of investor protection".[76]

68. Eight professional bodies in a joint submission
to our Committee[77]
indicated their support for the aims of the proposals as specified
in the consultation document and for the Treasury objective that
"the costs of regulation [should] be proportionate to the
benefits" but expressed concern that the detailed provisions
of the draft Order do not appear to achieve these policy objectives.
While agreeing that professional firms which intend to provide
mainstream investment business services should be authorised by
the FSA, they seek to ensure that the legislation "does not
fetter the ability of clients to discuss their affairs freely
with their chosen professional adviser."[78]

69. In its report on the draft Bill, the Treasury
Select Committee concluded that the definition of "financial
advice" needed to be drawn as narrowly as possible to prevent
unnecessary regulation.[79]
The Government, in its Response,[80]
agreed that it was important that the definition of regulated
activities was sufficiently clear to avoid, as far as possible,
people having to be authorised unless it was necessary for the
protection of consumers.

70. It has been suggested that, despite the intention
to draw the definition of financial advice as narrowly as possible,
some 20,000 professionals will have to register. This seems likely
to overwhelm the FSA. We did not have sufficient time to explore
this issue in oral evidence. We support the Government's intention
to ensure that authorisation is not required unnecessarily andurge the Treasury to ensure that its intentions are carried
out.

Regulated activities

71. The Regulated Activities Order will be made pursuant
to Clause 11 of, and Schedule 2 to, the draft Bill, which together
set the parameters of what may constitute regulated activities
under the new regime. The draft Order sets out in detail the activities
which will be required to be regulated, and broadly covers those
activities currently subject to regulation under the existing
banking, insurance and financial services legislation.[81]
It is under these provisions that other activities such as mortgages
or long­term health insurance could be brought within the
scope of the Bill. Views on whether regulation should be extended
to cover them were mixed.

72. In making decisions about bringing other activities
within the scope of the Bill it will be helpful to establish some
principles. Mr Davies[82]
said that he would want to ask a series of questions, "Is
it something where the costs of being locked into the product
are so high that the decision is very important to start with?
Is it something which is characterised by many repeat purchases?"
We have looked at the question of widening the scope to other
activities with such principles in mind, particularly the complexity
of the product, and the length of the contract.

MORTGAGES

73. In 1998 there were approximately 1.1 million
new mortgages for home purchases; with remortgages, further advances
and top­ups included the total would be nearer 1.8 million.
Mortgages are therefore one of the largest categories of long­term
financial products purchased by retail consumers.[83]

74. The Government announced in April 1998 that the
case for regulating mortgage business would be regularly reviewed
by Ministers. The first review would take place before the Bill
comes into force. In the meantime the Treasury would be monitoring
the Code introduced by the Council of Mortgage Lenders (CML) in
July 1997 to see whether it could deliver the Government's objectives
without statutory intervention. Whether statutory mortgage regulation
is introduced "will depend upon a number of factors, including
the extent to which the Code secures good quality advice for prospective
borrowers ... and provides remedies for borrowers' legitimate
grievances."[84]

75. We received various views about the extension
of regulation to cover mortgages. The Building Societies Association
(BSA) argued that conduct of business regulation should not be
extended to mortgages. It believed that the CML Mortgage Code
and the joint BBA/BSA Banking Code provided appropriate safeguards
for consumers and could be readily amended where necessary. Bringing
those areas into statutory regulation would create very significant
costs of compliance which would have to be passed on to consumers.[85]
The BBA and the ABI, in a joint submission, considered it very
important that the regulatory regime under the Bill should provide
an appropriate level of consumer protection, "taking into
account, inter alia, the nature of the financial services
in question and, where appropriate, the existence of alternative
means of regulation, such as industry codes of conduct. The conduct
of mortgage business is currently governed by such a code of practice....All
significant mortgage providers adhere to the Mortgage Code and,
since last year, mortgage intermediaries have also been covered
by the Code. We consider it to have been an effective alternative
to statutory regulation and the changes to the compliance machinery
for the Code, currently in the pipeline,...will further enhance
its effectiveness." [86]

76. The CML emphasised its belief that the regulatory
framework for selling mortgages must deliver sufficient consumer
protection in an effective and cost effective way. In its view
the Mortgage Code provides such a framework and it is a secondary
issue whether regulation should be on a voluntary or statutory
basis in the longer term.[87]
The Law Society of Scotland supported the CML's approach to the
evolving nature of mortgage regulation.[88]
It appears to us, however, that the trend is moving away from
voluntary to statutory regulation. The CML is disappointed that
the Government has decided to remove the option of giving power
to the FSA to endorse voluntary codes. Endorsing the Mortgage
Code would, it argued, have been a way of ensuring that the FSA
could influence future developments in mortgage market regulation.[89]

77. The Kensington Mortgage Company (KMC), the first
"non­conforming" mortgage company to sign up to
the Council of Mortgage Lenders Code of Mortgage Lending Practice,
in its memorandum to our Committee, argued that "Voluntary
regulation is ineffective because by definition not all lenders
and mortgage intermediaries fall within it." Effective disclosure
and transparency were essential if customers were to be able to
make informed choices about suitable products and customers would
be unable to make like­for­like comparisons unless the
whole industry adhered to the same standards.[90]

78. The Consumers' Association, in its response to
the July 1998 Consultation Document, said that "Entering
into a mortgage is one of the major financial decisions consumers
make and to leave that market outside the statutory framework
seems a startling omission....Statutory regulation should not
be taken to mean detailed prescriptive regulation in every case,
but universal coverage would give consumer confidence that the
FSA is indeed a single regulator for the whole of the financial
services market. Furthermore it would allow the FSA to effectively
punish those firms which did not comply with the rules. A major
drawback of self regulatory codes is that the only real sanction
available to those operating the code is to expel firms from the
market. This nuclear option is seldom used."

79. The FSA Consumer Panel considered that "Despite
the Government's rhetoric it is regrettable that the Bill fails
to provide a one­stop shop for consumers in terms of the
FSA's scope." It recommended that the remit of the FSA be
extended to include mortgages and long­term care insurance.
While recognising that the Treasury is waiting to evaluate the
effectiveness of the Mortgage Code, the Consumer Panel recommended
that mortgages should be included from the outset. Their reasons
included: that a mortgage is one of the most significant financial
transactions people make; that the choice between mortgages is
bewildering and complex; that a voluntary body is unlikely to
be able to take effective action against large companies who are
non­compliant; that it is difficult for the FSA and non­statutory
bodies to work together to provide effective consumer protection
because of information sharing problems; and the growth in new
types of home income plans, many of which are on the boundary
between investment products which the FSA will regulate and mortgages
that may fall outside the FSA's scope.[91]

80. "Most mortgage providers....are already
regulated by the FSA as are those mortgage advisers who also give
financial advice on investments. But this regulation does not
currently extend to mortgage advice....In addition, a large number
of firms who currently do not give investment advice and hence
are not regulated by the FSA....give mortgage advice to their
customers."[92]
The FSA found it difficult to be precise about the number of firms
which would be affected. Around 20,000 currently provide advice
on mortgages and they suggested that of these 20,000 firms "a
few thousand who are not currently authorised for investment business
might seek authorisation for mortgage advice; others might choose
to become appointed representatives of mortgage providers; and
no doubt some firms currently providing mortgage advice would
choose to cease that activity if it became subject to statutory
regulation."[93]

81. The FSA thought that the total cost of regulating
mortgage advice could be substantial, with the final sum depending
in part on whether the regime applied only to loans for home purchase
or whether it included all loans secured on people's homes. The
costs would include additional compliance costs and an increase
in the FSA's own costs which are in turn met by fees levied on
regulated firms. The FSA's initial assessment was that the regulation
of mortgage advice could require an additional 100-200 FSA staff.[94]

82. The Minister confirmed that issues about scope
would be dealt with under secondary legislation and that a final
judgement did not therefore have to be taken at the point where
the Bill was introduced. "It is something we have to make
a final judgement on when we come to publish and introduce the
secondary legislation that will determine the scope of the Act
and, therefore, we can make this decision later in the year."[95]

83. The Bill requires the FSA in deciding on any
extension of its scope to go through cost-benefit analysis, both
of its own costs and industry's costs, and to explain why it is
that the examples of consumer detriment that it might find would
be corrected by the new regulatory framework.[96]
The FSA has not yet done that analysis in relation to the mortgage
code because the CML code is new. "We will need to go through
a process of looking at how far the CML code has dealt with the
kind of problems that there were in the market and whether going
beyond that into our regulation would achieve a better outcome
at a reasonable cost."[97]

84. We are persuaded by the arguments of the Consumer
Panel and the Consumers' Association that mortgages should be
included from the outset. We recognise the importance of the transaction,
the complex choice that is now available between fixed and variable
rate mortgages, the wide range of initial discounts that are on
offer, and the associated penalties for early repayment in some
circumstances. Therefore we recommend that a decision in principle
be taken now to bring mortgage advice within the scope of the
FSA. We recognise that the timetable for implementation will have
to take into account the need to manage the appropriate transfer
from a voluntary code to statutory regulation and the availability
of regulatory resources.

LONG­TERM CARE INSURANCE

85. The Consumer Panel also raised the position of
long­term care insurance, endorsing the view of the Royal
Commission on Long term Care that long­term care insurance
should be subject to conduct of business regulation by the FSA
because most purchasers will be financially naïve; there
will be scope for high pressure selling to people who are elderly
and vulnerable; there will be a limited number of products on
the market; and many financial advisers will not have sufficient
knowledge of the benefit system to give full advice.[98]

86. The IFAA regarded the current unregulated status
of long­term care products as "a scandal" and welcomed
the fact that new products and developments could be brought within
the scope of the regulatory system without the need for further
legislation.[99]
It also suggested a finessing of the current proposals and offered
a third option between either regulating in­house or not
regulating at all: "Allow voluntary regulators to regulate
under an inspection and systems control regime created by the
FSA." The IFAA argued that such a system would not have too
great an impact on the structure of the FSA but would ensure effective
and structured regulation in areas which are deemed to be of lesser
risk. "While the intellectual argument for the current Bill
is the 'one stop shop', intermediaries who trade across the borders
of financial services, mortgages and general insurance will face
three regulators and three lots of costs. More importantly their
clients will face a confusing array of regulators and complaint
schemes."[100]

87. We agree that long-term care insurance should
be included. For the most part this would involve extending the
product coverage within the regulated sector. We agree that a
decision in principle should be taken and that it should be implemented
without delay.

GENERAL INSURANCE

88. At present proposed regulation of general insurance
is limited to the authorisation and prudential oversight of insurance
companies and Lloyd's and to certain other proposals in relation
to Lloyd's provided for in Part XVI of the draft Bill. "Following
consultations in 1998 on the need for statutory regulation of
insurance brokers and other general insurance intermediaries,
the Government is looking to the insurance industry to develop
effective voluntary standards of professional practice that will
command widespread support. It has been encouraged in this regard
by the work done towards creating a General Insurance Standards
Council (GISC)....Under proposals made by the insurance industry
for this standards body, membership of the Financial Services
Ombudsman Scheme will be a pre-condition of GISC membership."[101]
We welcome this development.

OTHER FINANCIAL SERVICES

89. Although we do not recommend that any other activities
should be brought within the ambit of the FSA at this time, we
recognise that the concept of a one-stop shop is an important
development for consumers. We therefore expect the FSA to put
in place a system of signposting to ensure that consumers concerned
about any financial service are directed to the appropriate body
if an activity about which they are concerned does not come within
its remit.

Lloyd's

90. "The Lloyd's insurance market is currently
regulated for solvency purposes by the Treasury. Other aspect
of Lloyd's business are regulated by the governing body of Lloyd's,
the Council, under powers conferred on it by the Lloyd's Acts
1871-1982. The Government believes that holders of insurance policies
at Lloyd's should enjoy the benefits of the same kind of supervisory
regime as those with policies issued by other insurers. A greater
independent element in the oversight of Lloyd's is long overdue.
The Bill therefore gives the FSA extensive intervention and authorisation
powers over Lloyd's."[102]
The Government has agreed with Lloyd's a process whereby the supervision
and regulation of Lloyd's includes a statutory base and the Bill
provides for external oversight of that regulation.[103]

91. We understand that many of the professional operators
of Lloyd's market consider it regrettable that the Lloyd's Acts
cannot be repealed or amended to permit the regulation of the
Lloyd's market by the FSA. Mr Jonathan Agnew, Executive Chairman
of LIMIT plc and a former member of the Council of Lloyd's, for
example, noted that the regulation of Lloyd's is still governed
by a series of Lloyd's Acts, the most recent of which is the Lloyd's
Act 1982. "Some of you on this Committee may think it inappropriate
that a collection of commercial businesses in a period of rapid
change should be governed by an Act which was passed at a time
17 years ago which long predated the present situation of Lloyd's
and the present state of the insurance market."[104].
Mr Agnew suggested that public legislation to amend or repeal
the Lloyd's Acts would be hybrid[105]
or even that they could be amended only by a further private Act
promoted by the Council of Lloyd's, a view which appeared to be
shared by the Minister.[106]

92. Mr Agnew proposed that the Bill should be amended
to allow the Treasury, on the written application of Lloyd's,
and with the approval of the FSA, to amend by secondary legislation
any provision of the Lloyd's Acts which concerns the regulation
of Lloyd's.[107]
The Association of Lloyd's Members expressed concern about this
suggestion. While recognising that the 1982 Act restricts Lloyd's
in many ways, "some of which may be commercially disadvantageous",
they believe that it also contains vital safeguards for members
of Lloyd's. They therefore suggest that any amendment to the Act
should be required to have been previously approved by a substantial
majority of the members of Lloyd's. "A further essential
safeguard would be that any amendment should be approved in advance
by the FSA."[108]
We have not had the opportunity to take further evidence on this
issue and are therefore unable to make a recommendation. However,
we have noted Mr Agnew's proposal and we recommend that the
Treasury give it active consideration before introducing the Bill.

Territorial scope

93. In its July Consultation Document the Government
stated that "The FSA will be responsible for regulating business
conducted in the UK by overseas firms....[it] will also be responsible
for the regulation of all the regulated business conducted by
firms that are based and run from here."[109]
Several responses to the Consultation Document queried the territorial
scope of the Bill and in particular expressed concern that Clause
8 of the Bill as drafted would imply a significant extension of
the UK's regulatory jurisdiction in respect of regulated activities
carried on abroad by businesses based here. The Government has
confirmed that it is not its intention to extend the territorial
scope of the current investment business, banking and insurance
regimes and that this would be clarified.[110]
In the Consultation Document on regulated activities it has therefore
reproduced the dual approach of the current Section 1(3) of the
Financial Services Act 1986 with an outward or "from the
UK" element and also an inward or "in and into the UK"
element. We welcome the intention to clarify this matter though
as the consultation process on the draft Order has not yet been
completed do not feel competent to comment on whether it will
in fact meet the concerns which have been expressed.

94. Another aspect of scope touches on the provision
of investment advice given by solicitors in Scotland. The Law
Society of Scotland, while recognising that financial services
regulation is a reserved matter for the Westminster Parliament,
observed that the Scottish Parliament would have responsibility
for the regulation of Scottish solicitors. At present the Bill
seeks no amendments to the existing primary legislation governing
Scottish solicitors.[111]
Ms Hewitt confirmed that "the regime we are setting in this
Bill will be a United Kingdom­wide regime" but added
that the Government would be looking at what amendments might
be needed to legislation such as the Solicitors (Scotland) Act
1980 to ensure that it achieved the single financial regulator
that it wants.[112]
We invite the Government to indicate how it intends to ensure
that Scottish solicitors, in common with members of the other
professions, are not faced with unnecessary regulatory overlap.

Double Jeopardy

95. The market abuse regime overlaps with criminal
offences on insider dealing and market manipulation and also with
rules applicable to authorised and approved persons. We received
some evidence to the effect that this raises the issue of double,
or multiple, jeopardy. The Treasury argued that the creation of
a single regulator significantly reduces the exposure of firms
to multiple jeopardy from the different constituent organisations
of the FSA. In addition the FSA, together with other investigative
and prosecuting authorities, is currently working on draft guidelines
covering the investigation of cases which might be of interest
to two or more agencies. "The intention behind the guidelines
is to ensure close liaison and co-operation between these agencies,
and to avoid any unnecessary duplication of effort." The
Treasury have given us more detail of their proposals in this
area.[113]
We consider this to be a sensible and workable approach.

Financial Promotion

96. The new financial promotion regime proposed in
the draft Bill seeks to rationalise and modernise the legislative
framework for financial promotions in the UK. In considering its
approach the Government has also focused on how to deal with "questions
posed by recent developments in technology, such as the advent
and increasing use of the Internet, scripted messages and multi-media
communications." One of the Government's main aims for the
new financial promotion regime is to avoid, as far as possible,
discriminating between different communications media and also
to ensure that legislation is sufficiently flexible to adapt to
further technological changes.[114]

97. The Real Time Club expressed concern about several
aspects of the Treasury's consultation documents on financial
promotion and regulated activity. It regarded the FSA's demand
for extra-territorial jurisdiction as "technically and legally
unenforceable" and the proposal that the FSA should have
power to require the removal of any promotional material from
the Net without any provision for appeal to the Courts as "overly
draconian."[115]

98. The changing nature and growth of communications
pose challenges to the regulatory authorities which seem likely
only to increase in the future. We recommend that the Government
should carry out a review of these likely challenges and ways
of dealing with them.